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F7 ACCA December 2013 Exam: BPP Answers

Question 1
Top tips
This question requires the preparation of two financial statements so it is necessary to work quickly and
methodically. As always, pay close attention to dates. In this case Southstar is a mid-year acquisition, so profit or
loss will need to be apportioned.
Easy marks
There were not any major technical difficulties in this question. The negative goodwill was flagged in the question,
so it was only necessary to know how to deal with it. There were plenty of marks available for the goodwill
calculation and for the property, plant and equipment.

Marking scheme
Consolidated statement of profit or loss
Revenue 1½
Cost of sales 3
Distribution costs ½
Administrative expenses ½
Negative goodwill 5
Loss on equity investments ½
Decrease in contingent consideration ½
Finance costs ½
Income tax expense ½
Non-controlling interest 1½
Consolidated statement of financial position
Property, plant and equipment 2
Equity investments 1
Current assets 1½
Equity shares ½
Retained earnings 3½
Non-controlling interest 1½
Contingent consideration ½
Other current liabilities ½

F7 ACCA December 2013 Exam: BPP Answers

Consolidated statement of profit or loss for the year ended 30 September 2013
Revenue (110,000 + (66,000 × 6/12) – 13,000(W3)) 130,000
Cost of sales (W1) (109,300)
Gross profit 20,700
Distribution costs (W1) (4,000)
Administrative expenses (W1) (2,950)
Finance costs (250)
Profit before tax 13,500
Income tax (3,500- 500) (3,000)
Profit for the year 10,500
Profit attributable to:
Owners of Polestar (β) 11,250
Non-controlling interest (750)

Consolidated statement of financial position as at 30 September 2013

Non-current assets
Property, plant and equipment (41,000 + 21,000 + 2,000 FVA – 100 dep) 63,900
Equity investments (16,000 – 13,500 (W2) – 200 loss) 2,300
Current assets (16,500 + 4,800 – 600 (W3)) 20,700
Total assets 86,900


Equity attributable to owners of Polestar
Share capital 30,000
Retained earnings (W4) 29,750
Non-controlling interest (W5) 2,850
Current liabilities
Contingent consideration 1,500
Other (15,000 + 7,800) 22,800
Total equity and liabilities 86,900

1 Expenses
Cost of sales Distribution Administrative
costs expenses
$’000 $’000 $’000
Polestar 88,000 3,000 5,250
Southstar × 6/12 33,600 1,000 1,200
Intragroup (W3) (13,000)
PURP (W3) 600
Depreciation on FVA (2,000/10 × 6/12) 100
Add contingent consideration (1.8 – 1.5) (300)
Negative goodwill (W2) (3,400)
Loss on investments 200
109,300 4,000 2,950

F7 ACCA December 2013 Exam: BPP Answers

2 Goodwill
$’000 $’000
Consideration transferred:
Cash (12,000 × $1.50 × 75%) 13,500
Contingent consideration 1,800
Non-controlling interest at fair value (W5) 3,600
Fair value of net assets:
Share capital 6,000
Retained earnings at 30.9.13 12,000
Add back post-acquisition losses (4,600 × 6/12) 2,300
Fair value adjustment on property 2,000
Negative goodwill (3,400)

3 Intragroup trading
$’000 $’000
Polestar sales to Southstar 4,000
Southstar sales to Polestar 9,000

DR Revenue 13,000
CR Cost of sales 13,000

Unrealised profit = 9,000 – 5,400 = 3,600

Still in inventory = 3,600 × 1.5/9 = 600
DR Cost of sales (Southstar) 600
CR Group inventory 600

4 Retained earnings
Polestar Southstar
$’000 $’000
Per draft 28,500 12,000
Pre-acquisition (W2) (14,300)
Negative goodwill (W2) (see note) 3,400
PURP (600)
Depreciation on FVA (W1) (100)
Adjustment to contingent consideration (W1) 300
Loss on investments (200)
32,000 (3,000)
Southstar × 75% (2,250)

Note: IFRS 3 Business Combinations states that negative goodwill should be credited in full to the acquirer.
5 Non-controlling interest
Fair value at acquisition (12,000 × $1.20 × 25%) 3,600
Share of post-acquisition retained loss (3,000 (W4) × 25%) (750)

F7 ACCA December 2013 Exam: BPP Answers

Question 2
Top tips
The issues to deal with here were the construction contract, the revaluation and the deferred tax. None of these
were complicated, but make sure you know how to calculate amounts due to/from customers on a construction
contract and how to deal with deferred tax on a revaluation.
Easy marks
There were quite a few marks for items which only had to be lifted from the trial balance, so it was important to get
the proformas down and collect those marks. The lease and the loan note were both simple and worth several

Marking scheme
Statement of profit or loss and other comprehensive income
Revenue 1½
Cost of sales 3
Distribution costs ½
Administrative expenses 1
Finance costs 2
Income tax expense 2
Gain on revaluation 1
Deferred tax on gain 1
Statement of financial position
Property, plant and equipment 2½
Inventory ½
Amount due on contract 1½
Trade receivables ½
Equity shares ½
Revaluation surplus 1
Retained earnings 1
Non-current lease obligation 1
Deferred tax 1
Loan note 1
Current lease obligation ½
Bank overdraft ½
Trade payables ½
Current tax payable 1

F7 ACCA December 2013 Exam: BPP Answers

Statement of profit or loss and other comprehensive income for the year ended 30 September 2013
Revenue (227,800 + 10,000 (W3)) 237,800
Cost of sales (164,500 + 8,000 (W3) + 15,400 (W1)) (187,900)
Gross profit 49,900
Distribution costs (13,500)
Administrative expenses (16,500 – 150) (16,350)
Finance costs (900 + 4,000 (W5) + 2,930 (W6)) (7,830)
Profit before tax 12,220
Income tax expense (W4) (350)
Profit for the year 11,870
Other comprehensive income:
Gain on revaluation of land and buildings (W2) 4,400
Deferred tax on gain (W4) (1,100)
Total other comprehensive income 3,300

Total comprehensive income for the year 15,170

Statement of financial position as at 30 September 2013

$’000 $’000
Non-current assets
Property, plant and equipment (W2) 115,000
Current assets
Inventory 26,600
Receivables 38,500
Due from customers on construction contract (W3) 6,000
Share capital 45,000
Revaluation surplus (OCI) 3,300
Retained earnings (19,800 + 11,870) 31,670
Non-current liabilities
Loan note (W5) 44,000
Deferred tax (W4) 7,100
Amount due under finance lease (W6) 16,133
Current liabilities
Trade payables 21,300
Income tax payable(W4) 3,400
Amount due under finance lease (W6) 6,897
Overdraft 7,300

F7 ACCA December 2013 Exam: BPP Answers

1 Expenses
Cost of sales Distribution Administrative
costs expenses
$’000 $’000 $’000
Per question 164,500 13,500 16,500
Construction contract (W3) 8,000
Depreciation (W2) – Building 2,400
– Owned plant 6,000
– Leased plant 7,000
Insurance provision reversal (150)
187,900 13,500 16,350
2 Property, plant and equipment

Land Building Plant Leased plant Total

$’000 $’000 $’000 $’000 $’000
Cost 1.10.12 12,000 48,000 65,700 35,000 160,700
Depreciation b/f (10,000) (17,700) (7,000) (34,700)
12,000 38,000 48,000 28,000 126,000
Revaluation 4,000 400 4,400
16,000 38,400 48,000 28,000 130,400
Building (2,400) (2,400)
P+E (48,000 × 12.5%) (6,000) (6,000)
Leased plant (35,000/ 5) (7,000) (7,000)
Balance 30.9.13 16,000 36,000 42,000 21,000 115,000
3 Construction contract
Revenue (work certified (10/25 = 40%)) 10,000
Cost of sales ((14 + 6) × 40%) (8,000)
Profit to date 2,000
Due from customers:
Costs to date 14,000
Profit to date 2,000
Less billed to date (10,000)
4 Income tax
Deferred tax balance:
On taxable temporary difference (24m × 25%) 6,000
On revaluation (4,400 × 25%) 1,100
Liability at 30 September 2013 7,100
Balance b/f at 1 October 2012 8,000
Reduce balance by 900

Income tax charge:

Provision for year 3,400
Prior year over-provision (1,050)
Reduction in deferred tax balance (900)
Deferred tax on revaluation debited to revaluation surplus (1,100)
Charge for year 350
5 Loan note
Proceeds 40,000
Interest 10% 4,000
Balance 44,000

F7 ACCA December 2013 Exam: BPP Answers

6 Leased plant
Cost 1.10.11 35,000
Interest 10% 3,500
Instalment paid (9,200)
Balance 30.9.12 29,300
Interest 10% 2,930
Instalment paid (9,200)
Balance 30.9.13 23,030
Interest to 30.9.14 2,303
Instalment payable (9,200)
Balance 30.9.14 16,133

Non-current balance 16,133

Current balance 6,897

Question 3
Top tips
The statement of cash flows is fairly straightforward as long as you don’t get confused by the transfer between PPE
and investment property. Always remember to check for a dividend payment and leave time for (b).
Easy marks
There are always plenty of easy marks in a statement of cash flows – the add-back of depreciation, the working
capital changes, share issues. Part (b) was also worth a lot of marks for intelligent comment and nothing much in
the way of ratios.

Marking scheme
(a) Statement of cash flows
Profit before tax ½
Depreciation ½
Loss on disposal of plant ½
Finance charges added back ½
Investment property income 1
Working capital items 1½
Interest paid 1
Income tax paid 1
Purchase of PPE 3
Purchase of investment property ½
Sale of PPE ½
Rental income received 1
Issue of equity shares ½
Equity dividends paid 1
Cash b/f / c/f 1
(b) (i) Up to 2 each – gross profit, overheads, investments 6
(ii) 1 mark per valid point 5

F7 ACCA December 2013 Exam: BPP Answers

(a) Statement of cash flows for the year ended 30 September 2013
$’000 $’000
Net cash from operating activities 4,350

Cash flows from investing activities

Purchase of investment property (1,400)
Purchase of PPE (W1) (5,000)
Proceeds of disposal of PPE 1,800
Rents received 350
Net cash used in investing activities (4,250)

Cash flows from financing activities

Share issue (17,200 – 15,000) 2,200
Equity dividends paid (W2) (2,800)
Net cash used in financing activities (600)
Net decrease in cash and cash equivalents (500)
Cash and cash equivalents b/f 300
Cash and cash equivalents at end of period (200)

Reconciliation of profit before tax to net cash from operating activities

Profit before tax 2,400
Fair value movement on investment properties 700
Rents received (350)
Depreciation 1,500
Loss on disposal 500
Finance costs 600
Decrease in inventories 800
Decrease in trade receivables 400
Increase in trade payables 300
Interest paid (W2) (550)
Tax paid (W2) (1,950)
Net cash from operating activities 4,350

1 Assets
Property, plant and Investment
equipment properties
$’000 $’000
Balance b/d 25,200 5,000
SPLOCI (1,300) (700)
Non-cash (depreciation) (1,500)
Transfer 1,600 (1,600)
Disposals (2,300)
Cash paid (β) 5,000 1,400
Balance c/d 26,700 4,100

F7 ACCA December 2013 Exam: BPP Answers

2 Equity and liabilities

Share Retained Interest
capital earnings Loan notes payable Tax payable
$’000 $’000 $’000 $’000 $’000
Balance b/d 15,000 8,700 5,000 50 1,850
SPLOCI 1,800 600 600
Cash received/(paid) 2,200 (2,800) (550) (1,950)
Balance c/d 17,200 7,700 5,000 100 500

3 Working capital changes

Inventories Trade receivables Trade payables
$’000 $’000 $’000
Balance b/d 3,100 3,400 3,900
Increase/(decrease) (800) (400) 300
Balance c/d 2,300 3,000 4,200

(b) (i) Kingdom’s cost of sales has increased by 8% alongside an increase in revenue of only 2%. This
bears out the concerns expressed by the purchasing director and raises the question of why this
increase has not been passed on to customers. This could be due to competitive pressure or simply
failure to respond promptly to rising prices.
However, this is not the only cause for concern. Kingdom’s net profit has fallen by 67% – a total of
$4.9 million. $1.25 million of this is due to the fall in value of investment properties and a fall in rental
income. Some of this will be due to Kingdom transferring one of its investment properties to owner
occupation, the balance suggests a fall in property prices. If this is the case, then the price rises
hitting gross profit are not part of a general inflationary trend, but reflect a situation relating to the
particular raw materials that Kingdom uses, a loss on disposal of plant and perhaps include an
above-inflation wage settlement.
That part of the fall in profit not accounted for by the rising cost of sales or the falling investment
income can be mainly attributed to higher administrative costs in 2013. A small part of this will be
depreciation on the property transferred to owner-occupation, but this leaves most of the rise of
$1.95 million unaccounted for. We do not have a breakdown of administrative expenses but it seems
likely that they have not been properly controlled. They may include a rise in salaries or a directors’
bonus. This is one of the issues the shareholders will be asking about.
(ii) In a period of rising prices costs tend to be understated, because the historical price paid for them
will always be lower than the current cost. If Kingdom values inventory using FIFO rather than
weighted average, this disparity will be even greater. If costs are understated, this leads to profit
being overstated, so it could be that the fall in profit shown in Kingdom’s financial statements is
actually higher in real terms.
Rising prices make it difficult to compare performance from one year to the next and can particularly
distort ROCE, especially where non-current assets are held at cost. In this case, inflated profits set
against undervalued capital employed will lead to inflated ROCE.
Kingdom does regularly revalue its properties, but in 2013 this has been a downward revaluation.
This reduces the value of capital employed and will serve to boost ROCE. The danger for a company
of inflated ROCE is that it can lead to higher wage demands and dividend payments, depleting cash
reserves. We can only speculate about wage demands but we can see that Kingdom has paid out a
dividend amount well in excess of its pre-tax profit and that its cash reserves have been reduced by
$1 million.

F7 ACCA December 2013 Exam: BPP Answers

Question 4
Top tips
It is important to read this question very carefully. Both of these scenarios are based on questions of ‘substance
over form’, but the second scenario reflects a genuine disposal, which you may not have been expecting.
Easy marks
Once you had worked out the correct treatment for these two transactions, it would have been easy to score full

Marking scheme
(a) 1 mark per valid point 5
(b) (i) Buy-back means Laidlaw bears risk of non-payment 1
Finease earns admin and financing fees 1
Receivables not derecognised 1
$1.8 million loan secured on receivables 1
$10,000 admin costs, $36,000 finance costs 1
(ii) All transactions at commercial values 2
Accounting as disposal is correct 1
Rental correct at $400,000 1
Repurchase option not an asset 1

(a) The Conceptual Framework states that the qualitative characteristics of useful financial reporting identify the
types of information likely to be most useful to users. Financial information is useful when it is relevant and
faithfully represents what it purports to represent. Its usefulness is enhanced if it is comparable, verifiable,
timely and understandable.
Therefore, information which does not possess the fundamental characteristics of relevance and faithful
representation is of no use. If those characteristics are present, the usefulness of the information will be
increased by the enhancing characteristics.
Faithful representation means that financial information is representing what it purports to represent. A
faithful representation should be complete, neutral and free from error. The importance of this can be
appreciated if we reflect on the usefulness to users of financial statements which are incomplete, biased and
full of errors.
(b) (i) The terms of the agreement between Finease and Laidlaw make it clear that Laidlaw has not
transferred the risks and rewards inherent in ownership of the receivables. Laidlaw is relying for
further receipts on how quickly Finease collects the receivables and will have to buy back any
receivables not collected after four months. So the receivables have been factored ‘with recourse’,
which amounts to Laidlaw raising a loan on the security of the receivables.
Laidlaw should continue to recognise the receivables, recognise the receipt of $1.8 million as a loan
and show the monthly fee of $10,000 as an administration fee and the 2% per month on outstanding
balances as loan interest. As no receivables have been collected up to 30 September the interest for
the month will be ($1.8m × 2%) $36,000. This and the administration fee are credited to the balance
of the loan, giving a total liability at 30 September of $1,846,000.

F7 ACCA December 2013 Exam: BPP Answers

(ii) Sale and leaseback transactions are often just a funding arrangement, but that does not appear to be
the case here. The leaseback arrangement involves an operating lease, rather than a finance lease, as
the present value of the minimum lease payments does not amount to substantially all of the fair
value of the property and the lease period is for a relatively short portion of the life of the property.
Also, the transaction has taken place on commercial terms and Laidlaw is not being offered the right
to repurchase on favourable terms.
So Laidlaw has accounted for the transaction correctly in derecognising the property and recording
the profit on sale of $1.5 million. The operating lease payments of $400,000 pa will be charged to
profit or loss.

Question 5
Top tips
The examiner has stressed here that this is an operating lease, so take that as read. However, the alterations to the
property can still be capitalised and the same goes for the restoration costs.
Easy marks
Once you had established what the correct accounting should be, the financial statement extracts were an easy six

Marking scheme
(a) 1 mark per valid point 4
(b) Statement of profit or loss
Operating lease rental 1
Depreciation charge 1
Finance cost 1
Statement of financial position
Alterations to leased property (at cost) 1
Accumulated depreciation 1
Provision (non-current liability) 1

(a) The lease is an operating lease so the rental payments of $2.3 million per annum are charged to profit or
The internal alterations of $7 million and the discounted present value of the restoration costs of $5 million
should be capitalised and depreciated over the remaining lease term. As the restoration of the property was
a condition of being granted permission to make the improvements, the improvements are an obligating
event in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and a provision is
made for the present value of this cost. The discount on the restoration costs will be unwound over the lease
term and added to the restoration provision.
(b) Statement of profit or loss (extracts)
Lease rental payment (2,300)
Depreciation ($12 million / 8) (1,500)
Finance cost (discount unwound: ($5 million × 8%)) (400)

F7 ACCA December 2013 Exam: BPP Answers

Statement of financial position (extracts)

Non-current assets
Property, plant and equipment ($12 m - $1.5m) 10,500

Non-current liabilities
Provision for restoration ($5m + $0.4m) 5,400